Harley-Davidson (NYSE:HOG), the largest U.S. motorcycle maker, is on track in executing the restructuring strategy, which it started in 2009 when Mr. Keith Wandell joined the company as its CEO. The strategy involves restructuring and consolidating operations for greater competitiveness, efficiency and flexibility. One of the major initiatives under this strategy is the ongoing overhauling of Harley’s major U.S. manufacturing facility at York, which will allow the company to improve its efficiency and shift to a more flexible work-force. Recently, in another initiative, the company has decided to exit New Castalloy, its Australian subsidiary producer of cast motorcycle wheels and wheel hubs, preferring instead to source these components from third-party suppliers.  This move indicates Harley’s greater focus on core production operations, which is likely to accrue savings for the company in the long-term. Harley Davidson’s market share in U.S. in third quarter stood at 58% with Polaris Industries (NYSE:PII), Honda (NYSE:HMC), Yamaha, Suzuki, Kawasaki and BMW controlling a major chunk of the remaining market.
We currently have a price estimate of $40 for Harley Davison’s stock, which is about 10% above current market price.
Outsourcing of non-core and uncompetitive operations will help margins in the long-term
Harley-Davidson acquired New Castalloy in 2006 and the facility produces the majority of cast wheels for the company’s motorcycles. But after extensive review Harley estimated that the production can be done more competitively by external suppliers and that the company can save as much as $9 million annually by procuring these components instead of manufacturing them. Harley expects to complete this transition by mid-2013, so it will only start accruing these benefits from 2014 onwards. 
Overall this shift underlines Harley’s increased focus on core production operations such as metal fabrication for motorcycle fuel tanks, fenders and frames, paint, final assembly and powertrain production. For other operations, which can be done more competitively by external suppliers, the company will prefer procuring them instead of manufacturing them in-house, which will help accrue savings in the long-term.
Harley hopes to generate annual savings of as much as $335 million from all its restructuring activities, which will help margins in the medium-long term.  But restructuring costs will likely keep the margins subdued in the near-term.Notes: